BETWEEN THE HEDGES

Tuesday, March 20, 2007

Wednesday Watch

Posted by Gary .....at 11:05 PM

Late-Night Headlines
Bloomberg:
- Asian economies including South Korea and Singapore are likely to expand at a slower pace in the first quarter as easing export orders curb production and consumer confidence ebbs, according to Capital Economics Ltd.
- Vietnam’s stocks are expected to drop 30% or more in coming months because earnings no longer support valuations after a rally that’s made them the world’s best performers, investors at a conference in Hanoi said. The market value of the Vietnam Index is $15.8 billion, up from $500 million at the end of 2005. Five stocks are valued at more than 100 times earnings, according to Vietcombank Securities. A CSFB report last month said net foreign buying on the Ho Chi Minh City bourse in January was about $700 million, larger than the comparable figure in Taiwan, a market 40 times larger than Vietnam.
- China Regulator Is Paper Tiger for Banks Funding Stocks Boom.
- Michael Mayo, the financial services analyst known for his coverage of Citigroup Inc. and JPMorgan Chase(JPM), is leaving Prudential Equity Group to join Deutsche Bank AG.
- Australian Prime Minister John Howard said his government is considering sending more troops to Afghanistan to help NATO forces counter Taliban insurgents.

WAFB:
- Louisiana Governor Kathleen Blanco will announce tonight that she won’t seek re-election.

Economic Times:
- Intl. Business Machines(IBM) is set to win an order of as much as $700 million from India’s Idea Cellular Ltd.

Shanghai Securities News:
- Sixteen steelmakers in China have agreed to suspend imports of iron ore from India after the South Asian nation’s government proposed a duty on shipments. The Indian ore, which is used to make steel and supplies medium- and small-sized steelmakers, accounted for 23% of China’s iron ore imports last year.

JoongAng Ilbo:
- South Korea and the US are seeking to remove North Korea’s plutonium form the country and destroy it overseas, citing a South Korean government official. The plan is one of the final goals in negotiations aimed at dismantling North Korea’s nuclear weapons program.

Late Buy/Sell Recommendations
Citigroup:
- The impact of mortgage market turmoil bears watching given the fluid nature of recent events. However, if we did not have underlying concerns about the state of the sub-prime mortgage holder, data could easily make the case for improvement in aggregate consumer well-being. Net worth rose sharply heading into 2007, mortgage rates have fallen slightly for most borrowers, and bank loans for real estate are growing overall, spurred by refinancing activity. While mortgage delinquencies have been rising for years, derivatives markets looked like a dam breaking in February, which paints an unrealistic view of recent economic developments. The aftermath of reckless lending at mid decade will play out for years whether the issue gets attention or not. But the credit issue looks far from able to generate a new cycle by itself, or drive immediate variation in broad consumer activity.

CSFB:
- The targets laid out for renewable energy growth plus the backdrop of increasing political and consumer concern over both greenhouse gas emissions and energy security, lead us to conclude that we are still only at the start of a multi-year, possibly multi-decade, global investment cycle in low-carbon generation and lower energy intensity. Political support for greater deployment of renewable energy forms is both clear and growing in the EU, in China, in the US and in the UK.

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.08%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (AIR)/.37
- (CHRS)/.19
- (FDX)/1.33
- (MKC)/.31
- (MS)/1.87
- (ROST)/.66

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,000,000 barrels versus a 1,180,000 barrel increase the prior week. Gasoline supplies are estimated to decline by -2,000,000 barrels versus a -2,486,000 barrel decline the prior week. Distillate supplies are expected to fall by -1,500,000 barrels versus a -2,733,000 barrel fall the prior week. Finally, refinery utilization is estimated to rise .5% versus a -.23% decline the prior week.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds rate at 5.25%.

BOTTOM LINE: Asian indices are higher, boosted by mining and technology shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. I also expect the FOMC to leave the benchmark Fed Funds rate at 5.25%, make more dovish comments and maintain their policy bias towards tightening. The Portfolio is 100% net long heading into the day.

Stocks Finish Near Session Highs on Buyout Speculation and Diminishing Subprime Fears

Posted by Gary .....at 6:22 PM

Indices
S&P 500 1,410.94 +.63%
DJIA 12,288.10 +.51%
NASDAQ 2,408.21 +.58%
Russell 2000 793.60 +.83%
Wilshire 5000 14,245.49 +.66%
Russell 1000 Growth 556.97 +.51%
Russell 1000 Value 813.95 +.80%
Morgan Stanley Consumer 696.29 +.90%
Morgan Stanley Cyclical 953.08 +.58%
Morgan Stanley Technology 557.66 +.53%
Transports 4,842.54 +1.0%
Utilities 491.07 +1.38%
MSCI Emerging Markets 113.27 +.83%

Sentiment/Internals
Total Put/Call .91 +12.35%
NYSE Arms .90 +67.60%
Volatility(VIX) 13.27 -9.05%
ISE Sentiment 136.0 +6.25%

Futures Spot Prices
Crude Oil 56.73 +.25%
Reformulated Gasoline 194.88 -.47%
Natural Gas 6.92 +1.12%
Heating Oil 168.0 -.50%
Gold 659.10 +.73%
Base Metals 251.15 -.31%
Copper 302.10 -.02%

Economy
10-year US Treasury Yield 4.55% -2 basis points
US Dollar 83.08 -.37%
CRB Index 304.96 +.12%

Leading Sectors
Gaming +1.75%
Airlines +1.61%
Tobacco +1.52%

Lagging Sectors
HMOs +.13%
Hospitals -.17%
Oil Service -.93%

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Afternoon Recommendations
CSFB:
- Rated (ZMH) Overweight.

Afternoon/Evening Headlines
Bloomberg:
- Consumer and utility shares carried the S&P 500 to its best two-day gain since August after a home construction report reassured investors the economy is growing without fueling faster inflation.
- Oracle Corp.(ORCL), the world’s largest software maker, said profit rose 35% because of increased sales of programs that help companies manage finances and inventories. The stock is rising 4% in after-hours trading.
- Adobe Systems(ADBE), the world’s biggest maker of design software, said first-quarter profit jumped 37% from a year earlier when it had charges related to the $3.4 billion purchase of Macromedia Inc. The stock is surging 4% in after-hours trading.
- Halcyon Asset Management LLC, a $10 billion hedge-fund firm, hired Kyle Ransford to start a real-estate fund to take advantage of lower property prices.
- Claire’s Stores(CLE), the largest US retailer of costume jewelry for teens, agreed to be taken private by Apollo Management LP for $3.1 billion.
- The perceived risk of owning bonds of Motorola(MOT) rose to the highest in 22 months after CEO Zander canceled a speech amid a proxy battle with billionaire activist Carl Icahn, according to traders.
- Bill Gross, manager of the world’s biggest bond fund at PIMCO, said he expects the Fed to maintain its “tightening” policy bias.

Nikkei English News:
- Mazda Motor Corp. will increase domestic production and release a hydrogen-electric hybrid vehicle. The company will announce it’s making a vehicle that combines Mazda’s proprietary rotary engine and an electric motor. The engine won’t emit carbon dioxide because it runs on hydrogen.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Medical longs, Retail longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, almost every sector rose and volume was about average. Measures of investor anxiety were above-average into the close. Today's overall market action was bullish. Gaming stocks gained significant traction throughout the day, rising almost 2%, with the index breaking above its 50-day moving-average on volume. The International Copper Study Group is saying today that global copper demand rose 2.2% last year, while supplies surged 5%. Moreover, demand was flat in December. Overall, the copper surplus was 350,000 tons last year vs. a 100,000 ton deficit in 2005. Finally, copper demand actually fell 1% in China, the world's largest consumer of the metal. The recent gains in the metal are almost completely the function of short-covering, in my opinion. I would look to short copper on any significant gains from current levels.

Stocks Post Largest 2-day Rally Since August on Buyout Speculation and Diminishing Subprime Fears

Posted by Gary .....at 4:15 PM

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Medical longs, Biotech longs and Energy-related shorts. I added to my (TSCO) long into this morning’s weakness and took profits in another trading long, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is average. Johnson Redbook weekly retail same-store sales rose 3.7% this week vs. a 3.4% rise the prior week. As I speculated a couple of months ago, weekly retail sales are now meaningfully above the long-term average of around 3.1%. As well, this week's increase is the best weekly rise since October of last year and substantially above last year's 2.5% gain during the same week. This is a big positive. And considering all the talk of job losses, housing collapses, soaring inflation and the surge in gasoline prices by the many stock market bears, it is even more impressive. There is little evidence of a meaningful consumer spending slowdown. For a substantial market decline to occur from current levels, evidence of this must begin to show up very soon, in my opinion. Halliburton (HAL), many investors' favorite oil services stock, just lowered first-quarter estimates from $0.59 to $0.49-$0.54. The company is blaming the shortfall on decreased drilling and completion activity in Canada and the northern U.S. The stock is falling 4.5% from session highs and dragging the entire oil service sector lower. Maybe the recent surge in energy insider selling was significant. The Philadelphia Stock Exchange Oil Service Sector Index (OSX) has been dead money for almost 15 months as the S&P 500 climbed over 10%.I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting, buyout speculation and short-covering.

Today's Headlines

Posted by Gary .....at 4:01 PM

Bloomberg:
- The S&P 500 is posting its best two-day gain since August, led by technology and steelmaking shares.
- Halliburton Co.(HAL), the world’s second-largest oilfield services company, said first-quarter profit will be lower than expected because of decreased drilling in Canada and the northern US. The shares plunged almost 10% on the report.
- Crude oil is falling another .37/bbl. on forecasts for warmer weather and diminished interest from speculators as global inventories remain at multi-year highs as demand wanes.
- US House Financial Services Committee Chairman Barney Frank will write legislation to require hedge funds to retain records of their financial transactions to use in legal proceedings if funds fail.
- SAC Capital Advisors LLC, a $10 billion hedge fund run by Steven Cohen, raised its stake in WCI Communities(WCI), a Florida homebuilders that is the subject of a $956 million bid from billionaire investor Carl Icahn. SAC now owns 4 million shares, or 9.5% of the company.
- Accredited Home Lenders Holding Co.(LEND) got a $200 million loan commitment from hedge fund Farallon Capital Management LLC, giving the money-losing subprime mortgage company time to attract more financing or find a buyer.
- Natural gas and liquid fuels extracted from coal count as alternative fuels, according to legislation the Bush administration sent to Congress today. “The goal of this policy is to reduce reliance on crude oil, specifically foreign supplies of crude oil,” said Craig Stevens, a spokesman for the Energy Dept. The proposed legislation also said biological fuels, such as ethanol, and fuel from municipal solid waste would count as alternative fuels. Bush plans to reduce US gasoline consumption by 20% over the next 10 years.
- European energy companies that grow crops used to make biofuels, such as D1 Oils Plc, may outperform, Goldman Sachs(GS) said.
- Copper supplies from mines and scrap yards outpaced demand by 350,000 metric tons in 2006, compared with a 100,000 deficit in 2005, the International Copper Study Group said. Usage in China, the world’s largest consumer of the metal, fell 1% in 2006.
- President Bush gave embattled Attorney General Alberto Gonzales assurances he wants him to remain on the job.
- Shares of Palm Inc.(PALM) rose as much as 10% after technology Web site Unstrung.com said the company is close to finding a buyer.

Wall Street Journal:
- Barclays Plc is offering more than $80 billion for ABN Amro Holding NV.
- Merrill Lynch(MER) and the California Public Employees Retirement System, called for legislation requiring emissions cuts of 60% to 90% by the middle of this century.

NY Times:
- Russia told Iran that it will withhold nuclear fuel for an almost finished power plant unless Iran suspends its uranium enrichment, citing officials from Europe, the US and Iran. Russian President Putin had resisted abandoning the project because it is highly profitable. The shift may stem from a public argument between Russia and Iran concerning Iran’s payment of bills or growing frustration on Moscow’s part over Iran’s refusal to stop enriching uranium at its Natanz facility.
- Some Republicans are questioning Democratic Senator Charles Schumer’s credibility as he leads a Judiciary Committee inquiry into the dismissals of eight US attorneys. Some argue that Schumer, chairman of the Democratic Senatorial Campaign Committee, is seeking political gain instead of an impartial investigation.

Washington Post:
- The FBI, criticized for gathering telephone records in terrorism cases, announced a new set of procedures to seek records only in emergencies.
- Strategists for Democratic Senators Hillary Rodham Clinton and Barack Obama criticized their opposing Iraq war positions during a public forum at Harvard University.
- The Knowledge is Power Program plans to announce today that it will build 42 charter schools in Houston, Texas, with $65 million in donations, making it the largest operator of such schools in the US. KIPP’s announcement raises the charter-school movement to a new level of influence, financial strength and public awareness, citing education experts.

NY Post:
- Apollo Management LP is close to buying children’s jewelry retailer Claire’s Stores(CLE) for $3 billion.

Financial Times:
- The Intercontinental Exchange(ICE) plans to expand 10-fold the capacity of its in-house clearing system in an attempt to boost its bid for the Chicago Board of Trade(BOT).
- The SEC is considering starting a test program with foreign regulators that would allow for mutual recognition of standards, citing an interview with SEC Commissioner Roel Campos.
- Legislators from California, Missouri and other states are seeking to make pension funds sell shares in companies that do business with Iran, North Korea or Sudan. Such a ban could force the funds to sell stock in many European companies that do business with these countries.

Panama America:
- Panamanian police and members of the US DEA seized about 20 tons of cocaine during a raid on a boat off the Central American country’s Pacific coast.

Valor Economico:
- Twelve new biodiesel plants will be built this year in Goias state, Brazil’s fourth-largest soybean producer and third-biggest cotton grower.

Housing Starts Rise, Building Permits Fall

Posted by Gary .....at 1:18 PM

- Housing Starts for February rose to 1525K versus estimates of 1450K and 1399K in January.
- Building Permits for February fell to 1532K versus estimates of 1550K and 1571K in January.

BOTTOM LINE: Housing starts rose more than expected last month, notwithstanding one of the coldest Februarys on record. The gain in housing starts was led by a 26% jump in the West and an 18% increase in the South. Starts in the Northeast dropped 30% and those in the Midwest fell 14%. I expect starts to fall next month. I continue to believe housing sales are stabilizing at relatively high levels and that new home construction will remain muted throughout the year as homebuilders greatly reduce inventories.